What are the challenges that Urjit Patel faces as the new CenBank Chief?

    Urjit R. Patel (born 28 October 1963) is an Indian economist, an accomplished banker, former employee of International Monetary Fund and has recently been appointed as Deputy Governor of the Reserve Bank of India (RBI). Patel, unlike Rajan, came to the central bank in 2013 after a stint as chief economic adviser,after having spent almost four years at the central bank. Because of his impressive educational qualifications and extensive work background, he has become only the second deputy governer of RBI in 70 years to be elevated directly to the post of governor. Its obvious why he is appointed to this post, let's look at what lies ahead for him. 

     He is taking over from Raghuram Rajan, a sucker for inflation, who brought about major structural changes in the economy such as well defined banking regulations, stronger monetary policies and effective exchange rates, thus giving it a major upswing. Although Rajan decided to not continue for a second term, his leadership not only stabilized the economy with the help of the government, but also restored faith in the RBI’s credibility.    

    While its now time for Patel to take over, he has a slew of challenges to deal with. Firstly, just like Rajan, he has to strongly resist the pressures of the stubborn state banks and cut borrowing costs more aggressively to boost the economy. Patel will have to inject more cash into the banking system, forcing banks to more quickly adapt to monetary policy changes when setting their lending rates. He has to continue stressing on pushing banks for deeper cuts, to fix their balance sheets and clean up their bad debts (amounting to Rs.6.3-trillion). Although Bankers say any further changes are unlikely to have much of an impact given the RBI cannot unilaterally force banks to lower lending rates.

    Secondly, Patel will have to focus on the Monetary Policy Committee (MPC) that will determine interest rates to meet inflation target. He will have to work on curbing inflation by cutting down the interest rates and simultanously penetrating liquidity into the system. Patel will have to cleverly walk the tightrope, keeping the Centre's interest in consideration of stimulating growth in the country. His proximity to Modi, most definitely, gives him a strong boost in setting the new framework of the Monetary Policy Committee. Under the new framework, a six-member panel would decide India’s monetary policy, very much like the US Federal Reserve’s Open Market Committee. Three members would be nominated by the government and the rest would be from RBI. 

    Thirdly, Patel is taking over when the markets are more calm. Since the beginning of Rajan's tenure, the rupee weakened 15.86% against the Canadian dollar. India was weighed down by massive current accound and fiscal deficits. However, the markets now expect firmness in liquidity management so that lenders have enough ammunition when credit demand picks up with better economic outlook. Indian stock markets are hugely dependent on volatile foreign flows, so any policy move that upsets foreign investors invariably drags equities lower. Dr Patel has big shoes to fill as Dr Rajan was hugely popular among foreign investors. However, he is widely regarded as having the professional and academic credentials he needs to make a success of his new job. Under his rule, we are likely to see continuation of the polices being a positive trigger for the market. Institutional investors both domestic and foreign would welcome the appointment of Patel as successor to Rajan. 

    Thus, an arduous task lies ahead for India’s new central banker. A good part of what lies ahead for Patel is work that spills over from the Rajan era. His legacy will comprise of how he deepens the corporate bond market, how he regulates the markets to lure foreign investors, how he works with the centre and brings about a balance and open effective communication between the economy and the governing bodies. 

    His predecessor Raghuram Rajan welcomed his appointment as his successor, calling him a close ally and saying it would ensure continuity in meeting the country's inflation objectives.